Tuesday 7 September 2010 17.00 EDT
First published on Tuesday 7 September 2010 17.00 EDT

If anyone had any remaining doubts about the resurgence of the City's wheeler dealers, today's appointment of Bob Diamond to lead Barclays should remove them. As another banker – HSBC's Stephen Green – prepares to join the government as trade minister, Barclays has elevated its arch dealmaker to succeed John Varley next March. HSBC is also believed to be grooming one of its investment bankers, Stuart Gulliver, to take the helm. It is a far cry from two years ago when investment bankers were reluctant to leave home for fear of being heckled in the street. It was left to the GMB union to try and stoke the fires of public anger, calling Diamond's appointment "insulting and divisive".

Diamond's rise to the top is a remarkable endorsement of his risk-taking: lucrative investment-banking activities now account for more than 80% of Barclays' profits. It is also a sign of an industry's renewed confidence in its ability to take on the government and face down cries for banks to be broken up.

Barclays appears to be throwing down the gauntlet over banking reform. The pugnacious Diamond is about as removed from the conciliatory Varley, as credit derivatives are from high street banking. City analysts say it is good news for the industry as a whole to have this powerful new champion.

In his 14 years at Barclays Diamond has never been involved in the retail side, for which the bank is best known. Over the past 10 years he has built up the investment side into an international player of some redoubt, recruiting high-flying bankers to the staid ranks of the high-street stalwart, offering bonuses to match. They transformed Barclays' business into a force that could rival the best Wall Street had to offer.

Diamond's coup came in the chaotic aftermath of the financial crisis when he negotiated a deal to buy core assets from the US arm of the collapsed investment bank Lehman Brothers, at a knockdown price of £1bn. That purchase has proved so lucrative that Barclays is now being sued by Lehman's defunct shell for a £3bn profit that it says the British bank made on the deal – a deal that epitomises the generation of bankers who turned Britain's conservative retail branch networks into global dealers in derivatives, bonds and exotic financial transactions in an era of easy money.

This brought burgeoning profits to support cheap mortgages for homebuyers, but also meant taking big gambles with the cash cow that was the deposit base. Barclays was lucky to avoid coming to grief over its international expansion after it started the bidding for the Dutch bank ABN Amro. The Royal Bank of Scotland snatched it away in 2007 with a higher bid that almost brought RBS down. In its pursuit of international esteem and rampant profits Barclays abandoned its roots in the high street. That was all going to change. Two years ago, banks were nursing large losses – all required some form of government support, whether a bailout or indirect aid, and ministers pledged to rein them in.

And yet, two years on, banks are back in good spirits. They have returned to profitability – partly due to the reduction in competition caused by the financial crisis – and pay, only slightly trimmed by Darling's tax, is rising. The return of self-confidence has seen them shrug off government criticism over the lack of lending to small businesses, setting up a taskforce to look into the issue and kicking it into the long grass. George Osborne, the chancellor, is still talking about reining in the banks through his banking commission, but it has got off to a slow start.

A healthy banking system is certainly desirable. But the structure of the industry remains substantially unaltered from the setup that caused the last financial crisis. Barclays is proud of the fact that it remained outside the government's bailout programme, but the elevation of Diamond appears to draw a line under the idea of co-operating with a government that wants to cut the banks down to size.

Diamond is fiercely protective of the bank's operations and will resist any attempt by the banking commission to break them up. That is not to say that Diamond will be a bad boss. He is charming, gregarious and keen to reward talent; and although he is a taskmaster, he is solicitous of the most junior intern.

But the government should be in no doubt that his appointment means that Barclays is back as a force to be reckoned with – and is, moreover, evidence of a newly resurgent banking sector.